401(k) ideas dissected at congressional hearing

WASHINGTON — The ideas of limiting 401(k) plan options to index funds and requiring all plan administrators to be brought under fiduciary duties were in focus last week at a congressional hearing on 401(k) fees.
There was broad agreement among participants that 401(k) fee disclosure should be improved and simplified. But there was disagreement about how much disclosure is needed and how it should be presented to companies that sponsor plans, as well as to plan participants.
Trying to beat the market may benefit some investors, but “it may not be good for this plan that is becoming a larger and larger percentage of people’s retirement,” House Education and the Workforce Committee Chairman George Miller, D-Calif., said of the 401(k).
Not ‘mad money’
“This isn’t their mad money; this is their retirement,” he said at the hearing, “Are Hidden 401(k) Fees Undermining Retirement Security?”
There is $2.5 trillion in assets in some 417,000 401(k) plans, which make up 95% of all defined contribution plans.
Mr. Miller indicated that he wants to see legislation that would improve 401(k) fee disclosure, and an official with the Government Accountability Office suggested that disclosure of fees and potential conflicts of interest among plans be required to be uniform and comprehensive.
With the average 401(k) balance at just $28,000, it is critical that workers get assistance in understanding their plans so that they can make informed decisions, he said. Mr. Miller was critical of what he called “a dizzying array of terminology,” including “revenue sharing,” “wrap fees,” “finders’ fees,” “shelf space,” “surrender charges,” “soft dollars” and “12(b)-1 fees.”
Congress, however, should make sure that any action it takes doesn’t have unintended consequences, said Rep. Howard McKeon, R-Calif., the ranking minority member of the committee. “I am concerned that as we go forward, that we don’t make things worse at the end of the day,” he said.
Mr. McKeon pointed to bloated mutual fund prospectuses as an example of government-mandated disclosures that don’t serve consumers well.
More than 80% of the 47 million 401(k) participants don’t know how much they pay in fees, which can have a dramatic impact on the amount of money on which they will have to live in retirement, testified Barbara Bovbjerg, director for education, work force and income securities issues at the GAO, a congressional agency in Washington that studies public-policy issues.
Indeed, she told the committee, even the Department of Labor is unable to determine the total fees plans are charging, as well as arrangements such as revenue-sharing deals, in which money managers agree to allow brokerage firms that market their funds to handle trades.
“Fee information in particular needs to be more widely available, more comprehensive and more clearly presented,” Ms. Bovbjerg said.
The Labor Department is considering new regulations to improve fee disclosure. It soon will issue a request inviting the public to suggest ways to improve plan fees and expenses, following its proposal last year to improve expense information that is reported on Form 5500 401(k) annual reports, the agency said in a statement.
Plan fees are between 1.5% and 3.5% higher than is reasonable, said Matthew Hutcheson, an independent pension fiduciary in Tigard, Ore. Regulatory exemptions allow firms to participate in managing 401(k) plans that don’t have a legal fiduciary duty, he said, which is a “root cause” of the lack of transparency in fees.
“If we held everybody to a fiduciary standard, this might self-correct,” and market forces can prevail to help plan sponsors and participants choose the most cost-advantageous plans, Mr. Hutcheson said.
While better fee disclosure is needed, focusing single-mindedly on fees shouldn’t obscure other important features of 401(k) plans, such as total return, risks and diversification of assets, warned Robert Chambers, a partner with the Charlotte, N.C., law firm Helms Mullis & Wicker PLLC. Mr. Chambers, who advises clients on 401(k) plans, testified on behalf of the American Benefits Council, a Washington organization that represents companies regarding their retirement and health benefits.
Mr. Chambers defended the
revenue-sharing system used by many companies that manage 401(k) assets, saying that it “is simply a way of paying for subcontracting. One service provider delegates a function to another who’s able to perform the function more efficiently and at less cost.”